Tiff Macklem, retail competition, flexible IT vs NGDPLT

Tiff Macklem is senior deputy governor at the Bank of Canada. On Friday, Tiff gave a speech on "Flexible Inflation Targeting and 'Good' and 'Bad' Disinflation". The Bank of Canada is not like the Fed; Tiff's speech reflects the Bank of Canada view.

The picture below reflects what I think Tiff might be saying:

Real GDP is on the horizontal axis, and the price level is on the vertical axis.

Look first at the red lines only. The intersection of the three red lines represents equilibrium in an economy with no shocks. There is no output gap (Y=Y*), and inflation equals the 2% target. (Imagine the intersection point of those 3 red lines trending slowly upwards at 2% per year, and trending slowly rightwards at the natural/potential real growth rate.)

Now let's hit the economy with a real shock. The retail sector suddenly becomes more competitive. There is a once-and-for-all drop in the average level of monopoly power in the economy. This shock causes the LRAS curve and SRAS curve to shift to the right. But does it cause the LRAS and SRAS curves to shift right by the same amount? That is the key question.

If the shock causes both LRAS and SRAS curves to shift right by the same amount (not as shown), the Bank of Canada should stick to targeting 2% inflation (stick to the red AD curve), so that actual output increases by the same amount as potential output and there is no output gap.

But if the shock causes the SRAS curve to shift right by more than the LRAS curve (as shown by the green curves), then sticking to the same 2% inflation target causes a positive output gap, because Y' would exceed green Y*.

I read Tiff as saying that the Bank of Canada believes that the real shock of increased retail competition has caused the SRAS curve to shift right by more than the LRAS curve, and that the Bank of Canada's response will be to temporarily cut the inflation target. If the Bank gets everything exactly right, the economy will be at the intersection of the 3 green lines (I made up the number 1.5%).

An alternative policy would be to replace Inflation Targeting with NGDP level targeting; replace the horizontal red AD(IT) curve with a downward-sloping (rectangular hyperbola) blue AD(NGDPLT) curve.

In my diagram, flexible inflation targeting and NGDPL targeting lead to exactly the same results. But the first gets those results by the Bank following discretion, and the second gets those results by the Bank following a rule.

Now, it is true that I rigged my diagram to get exactly the same results under NGDPLT as under flexible IT. In general, those 4 curves would not all intersect at the exact same point. NGDPL targeting would only keep the output gap at exactly zero if the SRAS curve had exactly the right elasticity and shifted by the exactly right amount relative to the LRAS curve. But then flexible inflation targeting would only keep the output gap at exactly zero if the Bank of Canada's estimates of that elasticity and relative shift were exactly right too.

But, by recognising the difference between "good" disinflation and "bad" disinflation, and saying that inflation targeting should be flexible enough to reflect that difference, Tiff is implicitly acknowledging one of the central arguments for NGDP level targeting: it handles real shocks better than inflation targeting.

But the question remains: why should a real shock cause the SRAS curve to shift right by more than the LRAS curve? The answer depends on the nature of the nominal rigidity. For example, if wholesale prices were sticky, but retail prices were set as a markup on wholesale prices, where that markup is a negative function of elasticity of demand (the degree of retail competition), then this is what we would expect to happen. If nominal wages were sticky, but prices flexible, we would get similar results. But if retail prices were the only sticky prices, we would get different results: the SRAS and LRAS curves would shift right by the same amount. It all depends.

In my opinion, strict NGDPLT will be imperfect but beats strict IT, simply because real shocks will typically shift the SRAS curve by much more than the LRAS curve. And so flexible IT would be worse than flexible NGDPLT, simply because the former would require more "flexibility" than the latter. And if there is no (reputational) cost to "flexibility", why have any explicit target at all? The sensible question to ask, because it does not have an obvious answer, is: would flexible NGDPLT beat strict NGDPLT?

Comments

[Tom Brown]

Nick, you lost me in the last paragraph... you sprung a new concept on us: "flexible NGDPLT" without telling us what that is exactly. Do you mean by that adjusting the NGDP level target depending on the elasticity of the SRAS curve in order to keep the output gap at exactly zero? Based on estimates by the BoC I suppose.

[Nick Rowe]

Tom: "Flexible inflation targeting" means "we target 2% inflation, but deviate a bit from the target temporarily if we think we really need to, to keep the output gap small".

"Flexible NGDPl targeting" means "we target 5% NGDP level growth, but deviate a bit from the target temporarily if we think we really need to, to keep the output gap small".

[Andy Harless]

Let me rephrase your sensible question: Just how much flexibility should NGDPLT have in the short run? I don't think it can be flexible at all in the long run (except for the flexibility to revise the target permanently), because then it wouldn't be level targeting any more. And to me it's pretty obvious that NGDPLT shouldn't be completely strict in the short run: if the central bank has good reason to believe that missing one target will make it easier to hit the next target, it would seem foolish to be compulsive about hitting the first target. But just how far it should deviate form this compulsivity is an open issue. (You can think about this as being analogous to a fixed exchange rate: how much should the CB/gov't be allowed to vary its currency reserves from quarter to quarter if it's committed to the long-run goal of continuing the peg?)

[Nick Rowe]

Andy: Yep. And one neat point about level targeting (whether P or NGDP) is that flexibility in one direction must be compensated for by flexibility in the opposite direction. There's a long run budget constraint on deviations from target.

[Kailer]

Tiff talks about how Phillips curves have flattened out, and hints at how IT has made Phillips curves really tough to measure. Given the difficulty in identifying supply shocks under IT isn't it possible that strict IT could be preferable to flexible if the loss of guessing wrong is not symmetric?

Or maybe some system where the CB takes account of where it is in the business cycle when trying to identify supply shocks. So suppose a situation like that in Canada. The BoC sees that inflation is low and can either treat low inflation as a supply shock and ignore it, or a demand shock and offset it. Given where the output gap is, the loss from guessing wrong is higher if it guesses supply than if it guesses it's a demand shock.

[Nick Rowe]

Kailer: In my diagram, if I had drawn the SRAS curves more elastic, but with the same vertical downward shift, the losses from strict IT would be even bigger, relative to first best flexible IT. But yes, the losses from wrong guesses with flexible IT would also be bigger relative to first best flexible IT.

And elastic SRAS curve (flat SR Phillips Curve) plus ignorance, is a strong argument for NGDPLT.

[Too Much Fed]

"Low inflation is also a means to an end - better economic performance. Low, stable and predictable inflation has been associated with more stable economic growth in Canada and lower and less-variable unemployment (Table 1). The average rate of unemployment has fallen, and fluctuations in unemployment, as measured by its standard deviation, have been reduced by more than one-third.6"

That can be described as a "Great Moderation".

I don't believe trying to use more and more currency denominated debt (which involves the MOE/MOA market) to grow and stabilize an economy will work.

"But theory combined with measurement is at least a crude guide. And as we observe disinflation across a number of advanced countries, the message from theory is that monetary policy should work to counter “bad” disinflation stemming from weak demand, but look through “good” disinflation from increased competition and improved productivity."

My version: If lower prices increase Q enough, that is good. If lower prices do not increase Q enough, that is bad. The problem with the bad part is that I believe it assumes real AD is unlimited. What if real AD is not unlimited?

[Tom Brown]

Nick, O/T: Would it be fair to describe the goal of NGDPLT (or "flexible" NGDPLT), or good monetary policy in general, as attempting to neutralize the weirdness of money? What I mean by that is that in the MM world view, nominal shocks to the demand for the MOA combined with sticky wages and prices can result in harmful transients (changes in productivity, employment, interest rates, etc) which last until the prices for all other goods and services in the economy adjust to this shock in MOA demand. Monetary policy should attempt to neutralize the effects of these shocks so these transients can be avoided. This says nothing about the fundamental driving forces in the economy... it still has it's strengths and weaknesses, but at least this weirdness of money can be neutralized.

[Nick Rowe]

Tom: I'm not sure it's useful to say that. I prefer: the goal of good monetary policy is to try to make Say's Law true.

[Tom Brown]

Nick, Ha!... I tried a similar summary w/ David Glasner and he complained about me dragging in Say's law, so I avoided it here. Most likely I did it wrong, ... so that's not saying anything about David, but thanks so much! I love that simple summary.

[Tom Brown]

Nick, last bit on this... I just went back to re-read my interchange w/ David. It was a lot clumsier (on my part), and I cleverly hid it on his "about" page to avoid public embarrassment, :D ...but here it is:
http://uneasymoney.com/about/#comment-34250

[Tom Brown]

I just tried my hand at a Rowe-vanesque story (though I don't know what possessed me to abandon apples & bananas!)

http://howfiatdies.blogspot.com/2014/02/phillips-curve-fallacy.html?showComment=1392167218287#c7105194601164056607

[Nick Rowe]

Tom: your "Row-vanesque" (Rovian?) story sounds right to me.

BTW, I *think* I stole the "monetary policy should try to make Say's Law true" thing from Brad DeLong. Not 100% sure though.

[Tom Brown]

Thanks Nick! Say is it true that the real reason you (and maybe Brad DeLong too!) want to make Say's Law true is because you want to "drown the govt in the bathtub and dance on Keynes' grave." :D
http://diaryofarepublicanhater.blogspot.com/2014/02/tom-brown-gets-his-proof-sumner-is-anti.html?showComment=1392178339553#c5965474208386149780

[Tom Brown]

Check out the next to last paragraph: http://delong.typepad.com/sdj/2005/08/national_review.html

[Nick Rowe]

Tom: good find. Yes, I must have stolen it from Brad. I am so happy my memory still works sometimes.

Brad DeLong is notorious for wanting to drown government in the bathtub and dance on Keynes' grave. Not.

I think that Keynes too would have agreed with the idea that the job of monetary policy is to make Say's Law true in practice. He says something very close to that, somewhere in the GT, IIRC. Something about if the central bank did things right, so the economy was always at "full employment", then and only then would all standard "classical" economics be right. By "classical" he meant "Say's Law".

Put "Say's Law" (and "Walras' Law") in the search box top right. I have written about it a lot.

Jean Baptiste Say himself later realised that Say's Law was wrong. Read Brad DeLong on that.

For Harberger triangles and Okun Gaps: http://worthwhile.typepad.com/worthwhile_canadian_initi/2012/12/triangles-rectangles-trapezoids-greyzones-and-gaps.html

[Nick Rowe]

Tom: I read your exchange with David Glasner. Yep. The rest of the MMs don't really say much about Say's Law, IIRC. They don't think in those terms. My guess is you would get a similar "huh?" reaction from Scott. I write about it a lot. Brad DeLong writes about it a fair bit. AFAIK, other econobloggers rarely mention it, except to say it's wrong. Writing about Say's Law is more of a keynesian thing, and only those very few of us (like me and Brad) who have read up on old "keynesian" disequilibrium macro in monetary exchange economies really want to get into it.

[Tom Brown]

Nick, thanks a ton! Regarding Scott's view of your statement about Say's Law:

"Tom, I agree with Nick, indeed I made a similar argument in a recent post at Econlog."

http://www.themoneyillusion.com/?p=26159#comment-318345

[Mark A. Sadowski]

Nick Rowe,
"I think that Keynes too would have agreed with the idea that the job of monetary policy is to make Say's Law true in practice."

So does this mean Mike Sax thinks that Keynes wanted to "drown the government in the bathtub and dance" on his own grave?

http://2.bp.blogspot.com/_5JJarCb6DPo/Sn9mKH2wI8I/AAAAAAAAAdc/vK2OHcZXJUk/s1600-h/keynsie+dansingjpg

[Nick Rowe]

Mark: lovely photo. Presumably that's his wife, the ballerina.

On re-reading that bit at the end of the GT, I think the only difference between Keynes and (say) Scott is that Keynes thought that sometimes (in a liquidity trap) monetary policy alone might not be able to do the job of making Say's Law true in practice.

If I were a Big Government guy, I would still want (the government's) central bank to make Say's Law true in practice. Especially since it would free up the rest of the government to do all the other big things I would want the government to do, without the constraint of managing AD.

[Tom Brown]

"If I were a Big Government guy, I would still want (the government's) central bank to make Say's Law true in practice. Especially since it would free up the rest of the government to do all the other big things I would want the government to do, without the constraint of managing AD."

Nick, that is exactly the point I'm always making to Mike, except you've said it more elegantly... and I'm not fully committed to the message: I just tell him that this view is consistent with being an MMer, and thus MMers are not necessarily out to dismantle the government and declare open season on the little guy (well in fact, you might all be out to do that -- it's not clear --, but in theory it doesn't have to be that way, right?). :D

I think he's worried that if MMists are right, that this will eliminate the justification for having a gov with an expansionist fiscal policy, ... or for having a gov at all, outside the CB. In fact I think he believes that's the primary motivation for MM: remove the last justification for gov, so we can drown it in the bathtub. Perhaps there is a wee bit of legitimacy to his concern... but still, it doesn't mean that you can't believe in "big government" as you say, and simultaneously advocate an MMist monetary policy.

[Nick Rowe]

Tom: "I think he's worried that if MMists are right, that this will eliminate the justification for having a gov with an expansionist fiscal policy, ..."

Remember as well, it would also eliminate the justification for having a government with a contractionist fiscal policy: "Aggregate Demand is too high! We must cut government spending!"

Fiscal policy is not about the average size of government over time; it is about volatility in the size of government over time.

[Tom Brown]

Nick, excellent point. On another matter, if the Fed wanted to raise the call rate (FFR) above the IOR rate (IORR) (i.e. so they could set FFR > IORR using OMOs, as they did pre-2008) without having to unwind their balance sheet first, I figure one way to do that would be to raise the reserve requirement (RR) enough to eliminate excess reserves. Thus if the reserves / checkable deposits = $2.5T/$1.5T = 1.67 currently, then raising it to 167% should do the trick. Why would the Fed want to set the FFR > IORR w/o unwinding their BS? I don't know: maybe they'd never want to. But would my scheme (raising the RR to 167%) have any other macro-economically significant side effects?

[Tom Brown]

Also, what is the problem when AD is too high? Inflation? More than that? ... I always think in terms of excess demand for the MOA being a problem, but what problems occur when demand for the MOA is too low? And am I correct to conflate AD being low with demand for MOA being too high (and vice versa)?

[Nick Rowe]

Tom: 9.02: given a clear target, it probably won't make much macro difference. Without a clear target, who knows how it would affect expectations of that target?

9.25. That is the wrong question to ask. Because it matters whether it is high relative to trend/expectation. Instead ask two questions:

1. What is the problem with too high trend growth in AD? Inflation is too high.

2. What is the problem with fluctuations in AD around that trend? Fluctuations in real activity, (plus maybe fluctuations in inflation).

[Tom Brown]

Nick, thanks again, for both. Re: raising RRs: Sadowski thinks it's contractionary:

http://www.themoneyillusion.com/?p=26159&cpage=1#comment-318483

"Raising reserve requirements increases the demand for the monetary base and thus it is contractionary."

If true, that seems like it might have advantages (compared to unwinding the CB BS or raising IOR) for putting the brakes on inflation should that be needed, no? But it doesn't sound like you agree that it's necessarily contractionary. Hmmm

[Tom Brown]

Scott's view sounds closer to yours:

"Tom, A higher RR probably wouldn’t have a big effect right now, but the risk is certainly there that it could be contractionary. On the other hand the expectations channel suggests it might be immediately contractionary."

[Nick Rowe]

Tom: it would be contractionary (if done by a big enough amount to matter). But so would the other policies, like increasing interest on reserves, or open market sales of bonds. I was saying there was little macro difference between those 3 policies.

[Mark A. Sadowski]

Nick Rowe,
"On re-reading that bit at the end of the GT, I think the only difference between Keynes and (say) Scott is that Keynes thought that sometimes (in a liquidity trap) monetary policy alone might not be able to do the job of making Say's Law true in practice."

Which part of the GT are you talking about? Is it this paragraph in Chapter 24, Section III?

"Our criticism of the accepted classical theory of economics has consisted not so much in finding logical flaws in its analysis as in pointing out that its tacit assumptions are seldom or never satisfied, with the result that it cannot solve the economic problems of the actual world. But if our central controls succeed in establishing an aggregate volume of output corresponding to full employment as nearly as is practicable, the classical theory comes into its own again from this point onwards. If we suppose the volume of output to be given, i.e. to be determined by forces outside the classical scheme of thought, then there is no objection to be raised against the classical analysis of the manner in which private self-interest will determine what in particular is produced, in what proportions the factors of production will be combined to produce it, and how the value of the final product will be distributed between them. Again, if we have dealt otherwise with the problem of thrift, there is no objection to be raised against the modern classical theory as to the degree of consilience between private and public advantage in conditions of perfect and imperfect competition respectively. Thus, apart from the necessity of central controls to bring about an adjustment between the propensity to consume and the inducement to invest, there is no more reason to socialise economic life than there was before."

http://www.marxists.org/reference/subject/economics/keynes/general-theory/ch24.htm

[Mike sax]

Actually, though now in a later comment Sumner himself seemed to question making SL true, ir I'm reading it right.

"Tom, Your friend is wrong, as you’d still have NGDP shocks and sticky wages."

http://www.themoneyillusion.com/?p=26159#comments

http://diaryofarepublicanhater.blogspot.com/2014/02/tom-brown-giving-us-some-scintillating.html?showComment=1392307855694#c8835996679631702953

Evidently I'm the friend he has in mind

[Mike sax]

"I think he's worried that if MMists are right, that this will eliminate the justification for having a gov with an expansionist fiscal policy, ... or for having a gov at all, outside the CB. In fact I think he believes that's the primary motivation for MM: remove the last justification for gov, so we can drown it in the bathtub. Perhaps there is a wee bit of legitimacy to his concern... but still, it doesn't mean that you can't believe in "big government" as you say, and simultaneously advocate an MMist monetary policy."

Certainly nothing Sumner says allays that concern-everything seems to confirm it. If there's so much similiarity between him and Keynes-as Mark among others is suggesting-then why talk about all this hyperbole about a stake through the heart of Keynesians? I think sometimes a duck is just a duck. What Scott's doing here is playing the game of 'hidden in plain sight' where you say what you mean but others assume you can't really mean it.

"it would also eliminate the justification for having a government with a contractionist fiscal policy: "Aggregate Demand is too high! We must cut government spending!"

The main Monetarists-Friedman, Scott now-clearly want smaller government. I've never heard him once suggest that we could have less austerity in the future and he's actually been going off tilt for months on how supposedly austerity does no harm at all as long as the Fed follows his panacea.

If I'm too skeptical he certainly does nothing to allay it.

[Mike sax]

With so many drinking the koolaid I guess it is left to me to be a little skeptical. If MM is proved right fine. It hasn't happened yet and I'm pretty unimpressed with the supposed victory of 2013.

[Tom Brown]

Mike, the friend Sumner was referring to was Vincent.

[Mike sax]

Oh ok. See, it's like Carly Simon said.

[Nick Rowe]

Mark: yes, that is exactly the passage I had found. By "central controls" Keynes seems to be referring to both monetary and fiscal, from the context a few pages earlier. And by "classical theory" he is presumably referring to the three "classical postulates", which include Say's Law, and which he says stand and fall together. So I think it is a fair reading of Keynes that he wanted to use monetary and fiscal policy to make Say's Law true in practice.

Of course, if "keynesianism" is interpreted as using *fiscal* policy to ensure that Say's Law is true in practice, then Scott does indeed seek to drive a stake through the heart of "keynesianism".

Vincent was saying that the gold standard would make Say's Law true. Tom was (correctly) saying Vincent was wrong, and Scott was agreeing.

Of course, NGDPLT would probably not make Say's Law exactly true in practice either, but it would very probably come closer.

[Morgan Warstler]

Guys,

This is just silly.

NGDPLT shrinks government. Period. The end.

It's far far trickier than Monetarism. To get it you have to THINK MECHANISTICALLY.

NGDPLT is a HARD CAP on growth every month. That means we're NOT PLAYING CATCH UP. The norm will be: every month we are a little bit shy or in front of a staying right on a laser. WE KNOW EXACTLY what the target is, we can predict it 10 years into future and not miss.

Let's say this is $65B per month this year to hit 4.5%.

Now let's think about the news story:

"Federal employees who were advocating for a 3% pay increase were disappointed by the CBO report that said it would PUSH INTEREST RATES HIGHER STARTING NEXT MONTH"

Because we're already AT LEVEL TARGET!

New spending that DOES NOT COME WITH PRODUCTIVITY GAINS TO OFFSET IS INFLATION. 100% of the time. Baumol is a joke.

And YES Nick, we will also get "the economy is overheating! let's cut government spending and we can keep rates low longer!"

Here's this pie of $65B for next month.

Some will be real growth, some will be inflation...

At run time, we will always side with the Real Growth side and we will always say "that's just inflation"

We KNOW which is which - bc GOVERNMENT PAYCHECKS = INFLATION.

Look guys, if we kept public employee pay at CPI since 1998, we'd have $6T+ LESS DEBT. We are overpaying them $550B this year - bc those pay raises have not come with ANY productivity gains!.

Anyway, you can noodle yourselfs to death here, but as a guy who's spending his life automate government, and deliver more services for less money, to cuts spending, and be able to pay out current pensions, I'd LOVE to have NGDPLT tomorrow.

[Nick Rowe]

Morgan: you should meet Mike Sax. The two of you will get on fine!

You don't need NGDPLT to convince people that the benefits of government employees should exceed the costs.

[Tom Brown]

Morgan, don't forget though what Scott had to say here:

http://www.themoneyillusion.com/?p=25886#comment-313204

"If I was a socialist my views on monetary policy would be exactly the same, target NGDP."

"MM is not about interest rates or the monetary base, it’s about expected NGDP growth. Get that on target and you’ve got a MM monetary policy. It doesn’t matter whether you use QE, fiscal stimulus, currency depreciation or or a magic wand. Of course if you do fiscal stimulus you’ve done more than implement a MM monetary policy. But if you are successful you have at least done that."

[Mike sax]

Yes, we will. I like Morgan. He tells the truth. I like him because he tells the truth.

[Mike sax]

Yes we do get along. I like Morgan because he tells the truth. I agree with Morgan that's the point of NGDPLT.

[Tom Brown]

Nick, I left a quote here for Morgan... I thought, but it must have gone to spam. I'll give it another go but w/o the link this time:

"If I was a socialist my views on monetary policy would be exactly the same, target NGDP."

"MM is not about interest rates or the monetary base, it’s about expected NGDP growth. Get that on target and you’ve got a MM monetary policy. It doesn’t matter whether you use QE, fiscal stimulus, currency depreciation or or a magic wand. Of course if you do fiscal stimulus you’ve done more than implement a MM monetary policy. But if you are successful you have at least done that."

... both quotes from Scott Sumner

(if you do fish the other out from spam, you can erase this one)

[Tom Brown]

Nick, I must have hit your comment limit. I now go straight to spam.

[Mike sax]

"Of course, if "keynesianism" is interpreted as using *fiscal* policy to ensure that Say's Law is true in practice, then Scott does indeed seek to drive a stake through the heart of "keynesianism".

That's how I interpret it.

[Mike sax]

Nick how would you interpret Keynes-while lving it as a distinct school of economic thought. I mean what is it that we learned from Keynes that we didn't know before or what policy insights did we have that we lacked before?

[Mike sax]

Assuming what makes it distinct is not it's theoretical basis for fiscal policy stabilizing demand

[Morgan Warstler]

"You don't need NGDPLT to convince people that the benefits of government employees should exceed the costs."

ROFL.

Nick, c'mon man. If your crowd of Economists cared about this, they'd look at Private sector is 3-4% Productivity gains YOY for last 40 years and Public sector is SUB 1% YOY.... and derive some facts.

40 years is fact Nick.

That means, you don't get to say "You don't need NGDPLT to convince people that the benefits of government employees should exceed the costs."

You have to say OUT LOUD:

We should shrink the share of the public sector because it is UNPRODUCTIVE. Any mat you use Nick says growing the productive sectors and shrinking the unproductive ones = more growth.

40 years is fact Nick. Even in Macro, that's the long run.

Look Nick, I'm doing what economists are supposed to do right? I'm giving a real simple narrative here. Tell me the equally compelling counter narrative where people don't view government pay checks as inflation, and keeping private sector borrow rates low isn't real growth.

[Nick Rowe]

Jeez! You guys. There was nothing in the spam filter newer than 10 days old, and now I have to fish three of you out!

Mike: "I mean what is it that we learned from Keynes that we didn't know before or what policy insights did we have that we lacked before?"

Better economists than me have argued that one, from all corners, with answers ranging from "almost everything" to "almost nothing". If you look hard enough, you can always find someone who said anything earlier, though maybe not in exactly the same way.

My answer is Clower's answer: the idea that demand functions may include not just prices but constraints on realised sales, when prices are not at market clearing levels. But that idea was not clear from reading Keynes. It only became clear when Clower said it more clearly.

[Nick Rowe]

Morgan: "Nick, c'mon man. If your crowd of Economists cared about this, they'd look at Private sector is 3-4% Productivity gains YOY for last 40 years and Public sector is SUB 1% YOY.... and derive some facts."

Do you understand how they measure productivity in the public sector? In most cases, the value of output is defined as the cost of inputs.

If productivity in cutting hair never changes, while productivity in making computer chips doubles every year, would we expect hairdressers' wages to stay constant, and chipmakers' wages to double annually? No. Basic micro theory.

[Vincent Cate]

Ok NGDPLT people. The government of Argentina has all the guns, appoints the people to run the central bank, writes the laws the central bank operates under, and has on several occasions just stolen the central banks reserves. Now prices are going up like crazy, the central bank does not have the reserves to withdraw money already created, the velocity of money is shooting up and what pray tell do you think the central bank can do to prevent hyperinflation?

[Vincent Cate]

Also, I can explain hyperinflation in many different economic theories but I have not gotten an NGDPLT theory of hyperinflation. Is there one?

http://howfiatdies.blogspot.com/2013/09/hyperinflation-explained-in-many.html

[Tom Brown]

Vincent, you might try your question on Lars Christensen: he does a lot of articles on emerging markets and in fact Argentina is one of his frequent article tags (he has a list of click on in the right hand column):

http://marketmonetarist.com/category/argentina/

Also there's this from Lars, which kind of ties into the Say's Law discussion above:

http://marketmonetarist.com/2014/01/29/the-awkward-moment-when-george-selgin-realized-he-agree-with-paul-krugman/

"However, in Real Business Cycle models money are assumed to always be neutral – both in the short and the long run. I fundamentally think that is completely crazy and all empirical evidence is telling us that money is certainly not neutral i the short-run. Keynesian and monetarists (and even Austrians) agree on that, but the Real Business Cycle theorists do not agree. They basically think that recessions are a result of people suddenly wanting take have very long vacations (ok, that is not what they are saying, but it is fun…)"

So maybe you're not an Austrian... maybe you're an RBCer at heart. What do you think?

[Tom Brown]

Vincent, obviously I'm wrong to categorize you as an RBCer: you never claimed that money is perfectly neutral in all time frames: you claim that FRB, paper money, etc cause us to deviate from that neutrality (as best I can tell).

[Vincent Cate]

Anyway, I think there are two big flaws with the NGDPLT idea.
1) Hyperinflation can hit suddenly. As one person puts it,
the Fed thinks they are dialing a thermostat up and down
but really they are playing with a nuclear reactor where
a wrong move can cause a chain reaction making the whole
thing melt down.
2) When the government needs money the central bank always
helps them out. If they did not want to then the rules, laws,
and people would be changed till they did, or the government
and central bank would fail together.